Draft Stability Programme Update 2021 - APRIL 2021 Incorporating the Department of Finance's Spring Forecasts
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Draft Stability Programme Update 2021 Incorporating the Department of Finance’s Spring Forecasts APRIL 2021 Prepared by Economics Division Department of Finance www.gov.ie/finance
Ireland’s Stability Programme
April 2021 Update
Incorporating the Department of Finance’s Spring Forecasts
Draft
Foreword
This update of Ireland’s Stability Programme takes account of measures introduced in Budget 2021 and
other Government initiatives. It includes an update of the economic and fiscal outlook (the Department
of Finance’s spring forecasts).1 This document will be submitted to the European Commission by 30th
April 2021 in accordance with the requirements of the European Semester.
It was published in draft form and laid before Dáil Éireann on 14th April.
The document incorporates horizontal guidance provided by the European Council to Member States
in March 2021 as part of the discussions on the European Semester (the annual cycle of economic
monitoring and policy guidance in the European Union). It has been prepared in line with the May 2017
guidelines on the format and content of Stability and Convergence Programmes – the ‘Code of
Conduct’. This Code requires a comparison of forecasts with those of other institutions; these
comparisons are set out in the annex. This document should be read in conjunction with Ireland’s
National Recovery and Resilience Plan which, for 2021, will incorporate Ireland’s National Reform
Programme.
The macroeconomic analysis and forecasts contained in this document are based on data available to
end-March 2021. The fiscal projections, as well as the epidemiological data, are based on data to mid-
April. The macroeconomic forecasts were endorsed by the Irish Fiscal Advisory Council on 7th April
2021 (annex 5),2 a legal requirement set out in the so-called ‘two-pack’. For comparison purposes,
each set of forecasts that has been subject to this endorsement process is set out (in headline terms)
on the Department’s website.3
The document includes several boxes; these are self-contained pieces of analysis on various topical
economic and fiscal related issues. Previous iterations of this document included a ‘heat-map’ which
assessed macroeconomic imbalances; this will, instead, be published separately over the summer.
In line with the Government’s Open Data Initiative, the data underpinning charts in this document are
available on the Department of Finance website4.
1 The Department publishes two sets of medium-term macroeconomic and budgetary forecasts each year:
- Department of Finance Spring Forecasts (contained in the Stability Programme Update), April;
- Department of Finance Autumn Forecasts (contained in the Budget), October.
2 The presentation provided to the Council, which may contain minor differences in figures, is available on the
Department’s website:
https://www.gov.ie/en/publication/5d363-spu-2021-presentation-to-ifac-1-april-2021/
3 Available at:
https://www.gov.ie/en/publication/a10e1-database-of-past-forecasts/
4 Available at:
https://www.gov.ie/en/publication/d7d58-spu-2021-chartpack/
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | iContents Foreword 1 Overview and General Policy Strategy 1 1.1 Policy Strategy 1 1.2 Short-Term Economic and Budgetary Outlook 4 2 Economic Outlook 9 2.1 Summary 9 2.2 Macroeconomic Outturn 2020 9 2.3 Macroeconomic Projections 2021 and 2022 13 2.4 Balance of payments and flow-of-funds 21 2.5 The Labour Market 22 2.6 Price Developments 25 2.7 Medium-Term Growth Prospects 2023 to 2025 26 3 Exchequer Developments and Outlook 29 3.1 Summary 29 3.2 Fiscal Outturn 2020 29 3.3 Fiscal Outlook 2021 29 3.4 Fiscal Outlook 2022-2025 31 4 General Government Developments and Outlook 35 4.1 Summary 35 4.2 General Government Balance in 2021 35 4.3 General Government Balance in 2022 35 4.4 Comparison of Forecasts 36 4.5 Structural Budget Balance 37 5 General Government Debt 40 5.1 Summary 40 5.2 Debt Developments 40 5.3 Structural Aspects of Irish Public Debt 41 5.4 Funding Developments 43 5.5 Comparison of Forecasts 44 6 Risk and Sensitivity Analysis 45 6.1 Summary 45 6.2 Scenario Analysis 45 6.3 Contingent and other Liabilities 47 7 Long-Term Sustainability of the Public Finances 51 7.1 Introduction 51 7.2 Background 51 7.3 Long-Term Budgetary Prospects 52 7.4 Policy Strategy 55 7.5 Conclusion 57 Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | ii
Tables, Figures, Boxes and Annexes Tables Table 1 Summary - main economic and fiscal variables 6 Table 2 External assumptions 14 Table 3 Macroeconomic prospects 16 Table 4 Savings, investment and the balance of payments 22 Table 5 Labour market developments 25 Table 6 Price developments 26 Table 7 Technical assumptions on expenditure 33 Table 8 Budgetary projections 2020-2025 34 Table 9 Exchequer balance to GGB 2020-2025 36 Table 10 Structural budget balance 38 Table 11 One off and temporary measure 39 Table 12 General government debt developments 41 Table 13 Gross and net general government debt 42 Table 14 Irish sovereign credit ratings 43 Table 15 Baseline versus downside projections 47 Table 16 Contingent liabilities 47 Table 17 Macroeconomic risk assessment matrix 49 Table 18 Fiscal risk assessment matrix 50 Table 19 Long-term spending projections, per cent of GDP 53 Table 20 Long-term spending projections, per cent of GNI* 54 Table A1 Difference between exchequer balance and general government balance 59 Table A2 Alternative presentation of exchequer position 60 Table A3 General government balance 2020-2025 61 Table A4 Comparison of vintages of receipts and expenditures for 2021 62 Table A5 General government interest expenditure 2020-2025 63 Table A6 Projected movement in general government debt 2020-2025 63 Table A7 Range of forecasts 64 Table A8 Comparison of forecasts 64 Table A9 Macroeconomic aggregates 2020-2025 65 Table A10 Exchequer and general government aggregates 2020-2025 66 Figures Figure 1 Mobility, payments and lockdown stringency during the pandemic 10 Figure 2 a) GDP in 2020; b) sectoral contributions to GVA in Ireland 11 Figure 3 a) Recovery in world trade; b) exports 12 Figure 4 Change in external assumptions relative to autumn 2020 forecasts 15 Figure 5 a) Modified domestic demand; b) Revolut payments data 17 Figure 6 a) Household savings; b) household deposits 18 Figure 7 Contributions to changes in GDP 19 Figure 8 a) Modified domestic demand; b) consumption 20 Figure 9 a) Income supports; b) hours worked, change from peak 23 Figure 10 a) Employment levels; b) unemployment rate 23 Figure 11 Pandemic impact on employment and earnings 24 Figure 12 a) Personal consumption; b) modified domestic demand 27 Figure 13 Real GDP a) € millions; b) per cent deviation from pre-pandemic baseline 28 Figure 14 End-March cumulative tax receipts relative to same period last year 30 Figure 15 a) comparison of 2021 GG balance forecast; b) GG deficit for euro area 37 Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | iii
Figure 16 Walk from the general government balance (GGB) to the structural balance 38 Figure 17 General government debt-to-GDP, debt-to-GNI* and interest-to-revenue 40 Figure 18 Composition of general government debt at end-2020 42 Figure 19 Maturity profile of Ireland’s medium and long-term debt 43 Figure 20 a) change in the 2021 debt ratio b) change in 2021 GG debt ratio euro area 44 Figure 21 a) GDP downside scenario b) employment downside scenario profiles 46 Figure 22 Population aged 20 and over by age group 52 Figure 23 Social welfare pension expenditure under selected scenarios 55 Boxes Box 1 The evolving relationship between stringency and activity 10 Box 2 Calibrating the 2021 lockdown shock 17 Box 3 Household savings and pent-up demand 18 Box 4 The labour market impact – a sectoral analysis 24 Box 5 Scenario analysis 28 Box 6 Estimating the structural balance in the context of the Covid-19 pandemic 38 Annexes Annex 1 Additional fiscal statistics and tables 59 Annex 2 Comparison of macroeconomic and fiscal forecasts 64 Annex 3 Macroeconomic and fiscal aggregates 65 Annex 4 Ireland’s National Recovery and Resilience Plan 67 Annex 5 Irish Fiscal Advisory Council Endorsement Letter 68 The data and analysis set out in this document are compiled by Department of Finance staff. Every effort is made to ensure accuracy and completeness. When errors are discovered, corrections and revisions are incorporated into the digital edition available on the Department’s website. Any substantive change is detailed in the online version. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | iv
Chapter 1
Overview and General Policy Strategy
1.1 Policy Strategy
The flow of macroeconomic information since the autumn has been mixed. In headline terms, three
key developments stand out and each will have a key bearing, not just on short-term economic activity,
but on trends over the medium-term also. Two of these – an orderly end to the EU-UK ‘transition period’
as well as the development, and subsequent mobilisation, of several Covid-19 vaccines – contribute
positively to economic prospects, while the third – the re-imposition of relatively severe containment
measures during the first quarter of this year – works in the opposing direction. Relative to the
Department’s autumn forecasts, therefore, it is a case of two steps forward and one step backwards.
The UK’s exit from the Single European Market5 – a slow-burning challenge that has cast a long shadow
over the Irish economy since mid-2016 – concluded in an orderly manner at the end of last year. The
Trade and Co-operation Agreement, agreed on Christmas Eve, now governs trade between Member
States of the European Union and the UK; this ensures a continuation of tariff-free, quota-free trade in
goods for Irish firms exporting to, and importing from, the UK.6 That said, bilateral trade under this new
regime is far from frictionless, with administrative costs arising from non-tariff barriers (customs,
regulatory and rules-of-origin checks) imposing an additional burden on firms trading with the UK.7
The orderly resolution of the UK’s exit from the European Union means that the key determinant of
short-term Irish economic prospects is the epidemiology of the Covid-19 virus, and the associated
vaccination programme. Just over a year since the World Health Organisation formally declared a
pandemic, the global death toll has reached 2.9 million people, with a total of 133 million confirmed
infections.8 These healthcare outcomes would have been significantly worse but for the public health
containment measures put in place across the globe in order to limit transmission of the virus. These
containment measures, however, have resulted in an economic shock that is without precedent in
peace-time. Living standards across the world have been severely affected, with global GDP falling by
an estimated 3¼ per cent last year, far more destructive than the shock to living standards caused by
the Global Financial Crisis.9 Across the world, fiscal, monetary and financial sector policies have been
mobilised to limit the economic fallout; without this exceptional level of support, the global contraction
would have been closer to 9 per cent last year. 10
Since the pandemic began, the scientific consensus has largely been that vaccination offers the most
promising route to loosen the grip of the virus on the economy. In this context, the results of several
clinical trials, undertaken over the course of last year, were published in late-autumn and confirmed a
high efficacy rate for a number of vaccines, these having been developed in record time. The European
Medicines Agency has subsequently approved four of these for use in the European Union, with others
5 The UK formally left the European Union at end-January 2020, but remained in the Single European Market until
end-December 2020, as part of transitory arrangements.
6 The Department had previously estimated that the short-run impact of a disorderly end to the transition period
could have knocked up to 3 percentage points off the level of GDP in the short-term.
7 The Trade and Co-operation Agreement covers trade in goods; work continues on a memorandum to govern
trade in services, particularly financial services, between the two jurisdictions.
8 Source: Our World in Data, as per 8th April.
9 Global GDP was essentially flat in 2009, the peak of the Global Financial Crisis, this essentially being an advanced
economy shock.
10 Source: IMF World Economic Outlook, April 2021.
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 1in the pipeline. Following some initial logistical and supply constraints, vaccine roll-out has accelerated, with 12 per cent of the Irish population inoculated at the end of the first quarter. A step-change in vaccine coverage is expected by the end of the second quarter, raising the prospects of significant economic recovery from the summer onwards. While tariff-free trade with the UK and vaccine mobilisation have both improved the outlook for the Irish economy beyond the near-term, the deterioration in the epidemiological situation at the tail-end of last year triggered the re-imposition of stringent public health containment measures in order to re-flatten the infection curve. Reflecting inter alia the emergence of new, more contagious variants of the virus,11 the infection rate increased sharply, signalling the beginning of a ‘third wave’. This third wave proved to be the most severe, with the infection rate surpassing that of previous waves and resulting in more hospitalisations and deaths.12 From an economic perspective, the containment measures have contributed to a stop-start sequence that has weighed on consumer and business confidence. A further contraction in domestic economic activity was almost certainly recorded in the first quarter, with a restrictions-induced fall in personal consumer spending relative to the previous quarter the main source of declining (modified) domestic demand. The infection rate peaked in mid-January at 1,500 per 100,000 persons. Its subsequent downward trend (160 per 100,000 in early-April), alongside progress in vaccination, allows for some modest relaxation of containment measures over the second quarter, and this should underpin economic recovery. Given high transmissibility, however, Government has decided to proceed with the easing of restrictions on a gradual, phased and contingent basis, so the improvement in domestic economic conditions is likely to be modest at first. Primary and second-level education has been prioritised, with re-opening of schools for most students at the end of the first quarter; this will be followed by the re- opening of the construction sector, as well as non-essential retail and outdoor activities, over the course of the second quarter. Restrictions – at least in part – are likely to remain in place for some time in those areas that require face-to-face interactions, dampening activity in the hospitality and leisure sectors. The need to maintain partly-closed external borders will weigh on the international tourism sector over the rest of the year. Against this backdrop, economic recovery should gain momentum over the second half of the year and into next year as public health containment measures are phased out. Thereafter, the biggest economic challenge will be the re-absorption of the unemployed and discouraged workers back into the workforce, a challenge that will be more difficult by structural changes triggered – or accelerated – by the pandemic. In terms of policy support, Government’s overarching objective has been to maintain a bridge to economic recovery, shoring-up household income and keeping firms afloat while restrictions remain in place. Discretionary policies have complemented the full operation of automatic fiscal stabilisers – the in-built fiscal supports arising from the cyclical decline in tax revenue and increase in unemployment- related spending, both of which are independent of formal decisions and / or legislation – with the public 11 The B.1.1.7 variant, first identified in the South-East of England, has been the dominant strain in Ireland for much of this year; by end-February, around 90 per cent of cases were linked to this variant, which is estimated to be about 70 per cent more transmissible than the original virus. 12 Over half of the Covid-related deaths in Ireland over the past year occurred during the third wave. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 2
deficit widening significantly13. The direct financial supports provided by government compare favourably with other countries;14 indirect supports, such as credit guarantees, have complemented these direct measures. While public debt has increased, prudent management of the public finances in the pre-pandemic period means that this rise in public indebtedness can be absorbed, and economic growth in the coming years is expected to help reduce the debt-income ratio. The fact that the pandemic is an exogenous shock – arising from outside the economic system and not the result of any significant imbalances that had accumulated – supports this approach. Importantly, notwithstanding the rising stock of public debt, the burden of servicing this has actually fallen on foot of the decline in borrowing costs. 15 This reflects the accommodative stance of monetary policy in the euro area, with national central banks absorbing much of the increased debt issuance16 of their respective sovereigns. In summary, the overall macro- economic policy mix – fiscal and monetary – has been very supportive in cushioning the impact of the pandemic. That said, it will be important to slow, and eventually halt, the pace at which debt is accumulated: higher debt is not a free lunch and, once the pandemic has subsided, it will be crucial to avoid any feedback loop between higher public debt and borrowing costs. Slowing the pace of debt increase will be achieved by reducing the fiscal deficit in a gradual, orderly manner that takes into account the need to continue providing some counter-cyclical support to the economy. The sequencing of deficit-reduction involves a phasing out of temporary supports once the health crisis abates and restrictions on mobility and economic activity are lifted. As economic recovery gains momentum, a cyclical improvement in the public finances should then support elimination of the deficit over time. On this basis, the baseline assumption is that the fiscal accounts can be returned to broad balance by the mid-part of this decade. Once a critical mass of vaccination has been reached, a key fiscal challenge will be to pivot away from generalised supports towards more targeted measures that help workers and firms transition from declining sectors to new, expanding sectors. The need to pivot support is emphasised by the transformative nature of the pandemic: the virus has triggered major changes, with many of these likely to persist. Examples of possible structural change include: shifts in consumer preferences (e.g. changes in demand for social consumption); overhauls in the way production is undertaken (e.g. automation, remote working, re-shoring); and alterations in the way consumer spending occurs (e.g. online, home delivery). While some of these trends were underway pre-pandemic, the pace of change has undoubtedly accelerated over the past year-or-so. From a policy perspective, this digitally-driven transformation of commerce has potentially far-reaching consequences. Most importantly, it appears that a reallocation of firms and workers across the economy will be necessary. For instance, it is clear the business model of some firms will no longer be viable while, on the other side of the equation, new firms in expanding areas will emerge. These lingering changes could also prompt some shake-up in the labour market: the demand for skilled labour may rise while that for unskilled labour could possibly move in the opposite direction. In such a scenario, 13 For a further analysis in this area see: Ireland’s automatic fiscal stabilisers in context, Economic Insights, Department of Finance, April 2021. Available at https://www.gov.ie/en/publication/bc298-economic-insights- economic-developments-during-covid-19-and-beyond/ 14 See Taking Stock – The Fiscal Response to Covid-19, Department of Finance, November 2020, available at: https://assets.gov.ie/99000/010f6d21-acee-417e-8a5e-d0a2ad64b97e.pdf 15 See Annual Debt Report 2020, Department of Finance, January 2021, available at: https://www.gov.ie/en/publication/291b8-annual-report-on-public-debt-in-ireland-2020/ 16 Via secondary market purchases. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 3
a co-existence of unemployment and vacancies, due to a mismatch between the skills of the unemployment and those needed by employers, would not be unreasonable. While this reallocation process is unlikely to be without at least some friction, the priority for Government is to help smooth the transition from the pre- to the post-pandemic economy. For workers, this involves better aligning the demand for, and supply of, skilled labour, including via up-skilling, re-skilling and public investment in other active labour market programmes. The overarching labour market policy objective will be to prevent a drift from short- into longer-term unemployment. In the case of the corporate sector, the Government has no role in propping-up firms whose business model is no longer viable; instead, Government will continue to maintain the necessary conditions that promote firm- creation and market dynamism. Crucially, the overall policy mix – counter-cyclical fiscal policy complemented by an accommodative monetary policy stance at the euro area level and supportive regulatory environment – has helped to limit spill-overs to the financial sector. Accordingly, the financial sector has not been an amplifier of the cycle, an important distinction between the current recession and its predecessor. This has cut both ways: during the most acute phases of the pandemic, forbearance on the part of the banks and non- bank lenders has played an important role in limiting the immediate economic and social fallout. Beyond the short-term, one important risk is the possibility that a rise in the insolvency rate and subsequent rise in non-performing loans post-pandemic, hinders the capacity of the financial sector to finance the transition to the ‘new normal’. Finally, once the worst effects of the pandemic have passed, long-standing issues will return to the fore. Ireland’s population is ageing rapidly and the fiscal costs are substantial: age-related public expenditure will rise by more than 3 percentage points of modified Gross National Income by 2030 simply to maintain service at existing levels. To put this into perspective, this would be the equivalent of €7 billion in today’s prices.17 At the same time, there is a need to finance the ‘two transitions’: the transition to carbon (net-) neutrality and the transition to a digitised economy. While corporation tax revenue has helped to plug the gap in many areas of public policy in recent years, this is unlikely to continue beyond the short-term and, indeed, international reform in this area has the potential to undermine this revenue stream in the not- too-distant future. While the exact quantum of potential revenue loss depends on many factors, the baseline assumption is that annual corporation tax revenue is around €2 billion lower by the mid-part of this decade; this revenue-at-risk figure will be revised as more information becomes available over time. 1.2 Short-Term Economic and Budgetary Outlook The Irish economy began the year on a weak footing. Following a contraction in domestic economic activity in the final quarter of last year, the stringent 18 containment measures in place for all of the first quarter have weighed on domestic economic activity in the opening months. Only a limited easing of restrictions is in prospect for the second quarter, as set out in the Government’s statement on 30th March 2021.19 17 See Submission to the Commission on Pensions, Department of Finance, March 2021, available at: https://www.gov.ie/en/publication/c199e-department-of-finance-submission-to-the-commission-on-pensions/ 18 Amongst the most stringent in the world, according to the Oxford Blavatnik School of Government ‘stringency index’. 19 Government statement available at: https://www.gov.ie/en/press-release/81029-government-announces-phased-easing-of-public-health-restrictions/ Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 4
That said, there is evidence to suggest that the relationship between the level of stringency on the one hand and the level of economic activity on the other, has weakened over successive infection waves. This would appear to reflect greater resilience on the part of households and firms. For instance, business continuity arrangements appear to be in a better position than this time last year, inter alia because the IT architecture necessary for remote working is now in situ. In a similar vein, many businesses have retrofitted their workplaces with the necessary infrastructure to facilitate social distancing. So, from a macroeconomic perspective, the suspicion is that the decline in activity in the first quarter has been less severe than during the spring of last year. Available data – high frequency indicators as well as real-time information relating to mobility and payments – lend support to this view. Estimates from the Department’s ‘nowcast’ model 20 suggest that modified domestic demand (MDD 21) contracted by around 6 per cent in the first quarter relative to the previous quarter. Beyond the first quarter, it is clear that forecasting short-term developments with any degree of precision is challenging in the current environment. Nevertheless, constructing a plausible pathway for the economy has an important public good dimension: the baseline scenario set out in this document provides a central assessment against which Government can monitor ongoing economic developments and calibrate policy accordingly. The baseline projection set out below rests on a number of conditioning assumptions. The most important relates to the epidemiology of the virus (and its variants). Vaccine roll-out is assumed to accelerate over the second quarter and thereafter, as supply and logistical constraints are overcome. As the more vulnerable sections of the population are increasingly immunised, the healthcare outcomes – hospitalisation, intensive care, fatality – of any subsequent infection wave will be less severe and ceteris paribus should not overwhelm the healthcare infrastructure. Accordingly, wider vaccine coverage will allow for a gradual relaxation of containment measures and a modest pick-up in economic activity from the second quarter, with recovery gaining momentum from the summer onwards. As the majority of the remaining restrictions are lifted – probably at the end of the year or early next year – economic activity should begin to normalise, although this ‘new normal’ may be somewhat different to the pre-pandemic norm. In this scenario, the assumptions regarding the relaxation of containment measures are reflected, in the first instance, in the pathway for consumer spending. By far the most important driver of consumer spending is the assumed decline in the household savings rate: as restrictions are relaxed, the flow of ‘forced’ (or involuntary) savings is reduced as households once again have the opportunity to purchase goods and services. This is particularly the case for so-called ‘social consumption’, which covers spending on meals out, trips to the cinema, etc. The baseline forecasts also rest on the assumption that households will finance some additional spending from the accumulated stock of ‘excess’ savings. While the Department estimates that the building-up of deposits exceeded ‘normal’ by around €11 – 12 billion over the past year-or-so, economic theory suggests that households tend to adjust their consumption patterns in response to permanent shocks to income rather than to transitory income gains. The income distribution of savers is another factor which supports the view that much of this windfall gain will not be used to finance additional consumer spending, as much of the additional savings is likely to have been undertaken by higher income households whose marginal propensity to consume is typically lower. Accordingly, the forecasts 20 See Daly and Rehill (2020) “Where are we now? Examining Irish Economic Developments in Real-Time” for further detail on Department’s nowcasting models. 21 Generally regarded as the most meaningful measure of economic activity in Ireland. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 5
for consumer spending assume around one-fifth of this windfall gain is consumed over the 18 months
beginning in the third quarter of this year.
An additional outlet for these excess savings is the domestic housing market (from an economic
perspective, this is also a form of saving in that it generates a stream of services – housing services –
over time). With supply remaining constrained in the short-term, if these additional funds are channelled
into housing assets the impact could be to inflate prices. In relation to other forms of investment, these
should recover as uncertainty begins to wane, with firms beginning to re-build their productive capacity.
Table 1: summary – main economic and fiscal variables, per cent change (unless stated)
2020 2021 2022 2023 2024 2025
Economic Activity
Real GDP 3.4 4.5 5.0 3.5 3.2 3.1
Real GNP 0.6 4.4 4.5 2.8 2.6 2.5
Modified Domestic Demand -5.4 2.6 7.4 3.8 3.4 3.4
Real GNI*^ -4.2 2.5 5.5 3.0 2.7 2.7
Prices
HICP -0.5 1.1 1.9 1.5 1.6 1.9
Core HICP -0.1 0.7 1.7 1.5 1.6 1.9
GDP deflator -0.5 0.4 1.8 1.5 1.6 1.6
Balance of Payments (per cent of GDP)
Trade balance 30.0 40.5 38.7 37.9 37.1 36.6
Current account 4.6 15.1 13.1 11.8 10.7 9.8
Labour Market
Total Employment (‘000)^ 1,972 2,051 2,276 2,351 2,405 2,457
Employment -15.1 4.0 11.0 3.3 2.3 2.2
Unemployment (per cent) 18.7 16.3 8.2 6.7 6.0 5.5
Public Finances (per cent of GDP, unless stated)
General government balance -5.0 -4.7 -2.8 -1.2 -0.7 -0.2
Structural budget balance* -0.7 -1.0 -1.9 -1.2 -0.9 -0.4
Debt ratio (year-end) 59.5 62.2 60.2 59.0 57.7 55.4
Debt ratio (per cent of GNI*)^ 105.6 111.8 107.4 105.8 103.9 100.1
Net debt position (year-end)~ 51.2 54.3 54.1 53.0 51.6 49.7
* estimates of the structural budget balance are subject to even greater uncertainty than normal.
^ GNI* is based on GNI less depreciation of R&D-related service imports and trade in IP, depreciation of aircraft
for leasing, and net factor income of re-domiciled PLCs.
~ net debt figures from 2021 estimated by mechanical extrapolation of assets.
Source: CSO for 2020 and Department of Finance 2021-2025. 2020 GNI* also estimated by Department of Finance
Taking these developments into account – increased spending by households and firms as restrictions
are eased – alongside another positive contribution from Government spending, MDD is projected to
increase by 2½ per cent this year (GDP by 4½ per cent). As public health containment measures are
phased out, MDD should accelerate further next year; a growth rate of 7½ per cent (GDP of 5 per cent)
is projected, in part reflecting a ‘catch-up’ period as pent up consumer and business spending drives
above-trend growth. On this basis, the level of MDD would revert back to its pre-pandemic level by the
final quarter of 2021.
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 6Beyond the short-term, an important but still open question relates to the extent of any permanent destruction to the economy’s productive capacity from the pandemic, so-called ‘scarring’ effects. There are several channels through which these could arise, including an increase in long-term unemployment, the scrapping of parts of the capital stock (some machinery and equipment is extremely specialised and cannot be re-deployed from declining to expanding sectors) or through lower productivity. At this stage, the evidence base is extremely limited and the scale of ‘scarring’ will only become clear over time, as more data become available. As a very preliminary estimate, the Department’s medium-term projections are based on average MDD growth of 3½ per cent per annum over 2023-2025. Indeed, notwithstanding reversion to trend growth rates by 2023, the level of MDD and consumption at the end of the forecast horizon would still be below the level suggested by their respective pre-pandemic trends (figure 12), with employment also lagging. It must be stressed, however, that until the pandemic subsides, any assessment of scarring is highly tentative; estimates are also time-sensitive and will be revised as additional information becomes available. 22 Sectors where activity has been most curtailed by the public health containment measures have tended to be relatively labour-intensive, where product delivery requires face-to-face contact and, therefore, not conducive to remote working. As a result, the fall-out in the labour market has been particularly severe: at the end of last year, the number of hours worked was nearly 10 per cent below its level immediately prior to the pandemic. The fall-out in the labour market prompted large-scale government intervention to maintain the employer-employee link and to support household incomes. The partial re-opening of contact-intensive activity over the remainder of this year should provide some support to the labour market, with employment projected to increase by 79,000 (4 per cent). For next year, an additional (net) 226,000 (11 per cent) jobs are projected to be added, though the level of employment will still remain below its pre-crisis peak. Of course, the baseline projections are contingent on a range of epidemiological assumptions and implied public health restrictions. For this reason, a downside scenario is also included in this document based on a severe epidemiological scenario whereby the current, stringent restrictions remain in situ for a prolonged period. In these circumstances, GDP growth this year would be almost 1 percentage point lower than the main baseline projection, and would be 2½ percentage points lower next year. As a result, by the end of next year, the Irish economy would be approximately 4½ per cent smaller than it would under the baseline forecasts. An intermediate scenario which involves some level of repeated restrictions, each of diminishing impact, before the full benefits of the vaccination programme kicks in is also considered and would have roughly two-thirds the impact of the downside scenario. The shock to private sector income has been much less severe than the shock to private sector output and expenditure, the reason being the exceptionally large level of public sector support for private sector incomes. While necessary, this has come at considerable cost: last year, a general government deficit of €18.4 billion (5.0 per cent of GDP) was recorded. For this year, a deficit of €18.1 billion is in prospect, the equivalent of 4.7 per cent of GDP. This projection is based on the assumption of no-policy change: on this basis, some of the most costly transfers from the government sector to the private sector are due to expire at end-June, and any extension would worsen the deficit. Public indebtedness is projected at €239.3 billion this year, the equivalent of 111.8 per cent of GNI*; this would put the Irish debt-income ratio amongst the highest in the developed world. 22For a detailed overview of the scarring literature see: Scarring effects, Economic Insights, Department of Finance, April 2021. Available at: https://www.gov.ie/en/publication/bc298-economic-insights-economic-developments- during-covid-19-and-beyond/ Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 7
A deficit of 2.8 per cent of GDP is projected for next year, as most of the emergency temporary supports will have been withdrawn. Public indebtedness is projected at €247.4 billion, 107.4 per cent of GNI*. While public indebtedness has increased, the burden of public debt has fallen. This is true in Ireland and in most advanced economies, and largely reflects the decline in interest rates associated with large- scale central bank purchases of sovereign debt (sometimes referred to as ‘quantitative easing’). This means that, notwithstanding the increase in public debt, the sustainability of this higher indebtedness has actually improved. Beyond 2022, all fiscal supports are assumed to have been withdrawn. With a recovering economy, this should be sufficient to better align revenue and expenditure by the mid-part of the decade. There are, however, clear downside risks to this pathway for the public finances. International corporate tax reform could weigh more heavily on this revenue stream than is currently assumed and, leaving aside the fiscal implications, could undermine Ireland’s attractiveness as a location for inward investment. Having said that, the public finances are in a much better position to absorb the expected shock to corporate tax revenue than, say, a decade and a half ago. The tax base is wider than prior to the global financial crisis and, importantly, there is time to build up the resilience of the public finances before international reforms move to the implementation phase. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 8
Chapter 2
Economic Outlook
2.1 Summary
The domestic economic outlook is very different to that which underpinned Budget 2021 last October.
The Trade and Co-operation Agreement between the EU and UK has improved the outlook for the
economy, as has the roll-out of Covid-19 vaccines. On the other hand, the onset of the third infection
wave at the turn of the year, fuelled by the more transmissible B.1.1.7 variant, is a setback for the
economy. The stringent public health restrictions mean that the domestic economy likely contracted in
the first quarter of this year, albeit not to the same extent as during the first wave last year. Only limited
recovery is in prospect for the second quarter. Overall, therefore, since last autumn it is a case of two
steps forward, one step backwards.
The forecasts set out in this chapter are based on the assumption that the ending of the third infection
wave allows for a very gradual, phased and incremental easing of public health containment measures
over the course of the second quarter. This, of course, cannot be taken for granted: while the infection
rate has fallen from its peak earlier this year, it remains stubbornly high. Additionally, the infection rate
is now rising once again in many continental European countries, with recovery in many Member States
of the European Union postponed until the third quarter.
The short-term forecasts assume that the pace of vaccination ramps up over the second quarter, in line
with the Government’s projection that four-fifths of the adult population will be (partly – at least ‘one
dose’) inoculated by end-June. Rising vaccine coverage will allow for a more significant easing of
containment measures over the summer, with positive implications for economic activity. Lower levels
of public health restrictions are assumed in the second half of the year, with minimal restrictions on
economic activity next year, allowing for a substantive, and sustained, economic recovery.
Conditioned upon these assumptions, modified domestic demand (MDD) is projected to increase by
2½ per cent this year (GDP growth of 4½ per cent). MDD growth is expected to accelerate next year,
reaching 7½ per cent (GDP by 5 per cent), as pent-up consumer and business demand is released.
Given very high levels of uncertainty, the margin of error around these projections is sizeable. Overall,
MDD is projected to pass to its pre-pandemic level around the fourth quarter this year, though the
recovery in employment will continue to lag. Over the medium-term, MDD growth is projected to
average 3½ per cent per annum; the equivalent for GDP is an annual average growth of 3¼ per cent.
However, despite broadly returning to trend growth rates by 2023, at the end of the forecast horizon the
level of consumption and MDD will both remain below the levels that otherwise would have been
reached had both continued series grown at pre-pandemic trends (figure 12) since the onset of the
pandemic, with employment also lagging.
The labour market has been borne the brunt of the pandemic. When those in receipt of the Pandemic
Unemployment Payment (PUP) are included, the Covid-adjusted unemployment rate is projected to
average around 16¼ per cent this year, before declining to 8¼ per cent next year as the economy is
fully re-opened.
2.2 Macroeconomic Outturn 2020
In keeping with patterns evident elsewhere, the fallout from the pandemic was not uniform across the
various sectors that constitute the Irish economy. Sectors where transactions between producers and
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 9consumers are ‘contact-intensive’ were severely affected, with most workplaces largely shut for most
of last year.
Box 1: The evolving relationship between stringency and activity23
One side effect of the pandemic has been to change the way economists monitor emerging macroeconomic
trends. Given the speed of developments over the past year or so, and because of lags inherent in the production
of official data, economists all over the world have increasingly resorted to exploiting the information-content
embedded in payments data, GPS-mobility data, etc. This shift to so-called ‘big data’ is likely to be a permanent,
or structural, phenomenon.
In order to be able to assess economic activity in real-time, the Department of Finance monitors, and publishes,
a suite of real-time indicators. These data cover different sectors of the economy and, while less comprehensive
than official data, these can help shine a light – in real time – on emerging economic developments.
Importantly, these data can help to answer the question of whether the relationship between the level of lockdown
stringency and economic activity has evolved over time. The data are set out in the graph below which shows
stringency (as measured by the Oxford University ‘stringency index’), activity (as proxied by mobility – measured
by Google mobility data) and payments (as measured by data provided by Revolut).
The key takeaway is that the dramatic fall in activity evident in ‘lockdown 1.0’ – as reflected in payments data and
mobility data – does not seem to have been repeated in subsequent lockdowns triggered by rising infection
waves. This is most likely due to the more widespread adoption of new technologies by consumers and firms.
During ‘lockdown 3.0’ which covered the first quarter of this year (and which largely remains in place), the level
of stringency is in line with that of lockdown 1.0 (and is amongst the most stringent in the world). Notwithstanding
this, the level of spending and mobility has fallen by only around half of that in the first lockdown. Whether or not
this is borne out by official data remains to be seen, but the available evidence at this point in time is suggestive
of a weakening in the stringency-activity relationship. Such a phenomenon would be consistent with patterns in
other countries.
Figure 1: Mobility, Payments and Lockdown Stringency during the pandemic.
60 0
Mobility
40 -10
Revolut Spending Index
-20
20 Stringency Index
change from baseline, pp
-30
stringency index
0 -40
-20 -50
-40 -60
-70
-60
-80
-80 -90
-100 -100
Source: Google, Revolut, Oxford Blavatnik School of Government.
Note: Mobility is measured as the average of activity at locations categorised as ‘retail and recreation’ and ‘workplaces’ by
Google.
Stringency index is inverted.
23For further information on the use of and insights from real-time data throughout the pandemic see:
The pandemic through the prism of high frequency indicators, Economic Insights, Department of Finance, April
2021. Available at: https://www.gov.ie/en/publication/bc298-economic-insights-economic-developments-during-
covid-19-and-beyond/
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 10Perhaps the most obvious example was the retail, distribution, accommodation and food services
sector, where gross value added (a close approximation for GDP) fell by 17 per cent over the course of
the year. On the other hand, sectors where output can be delivered digitally (public sector, financial
services, etc.) or where production can take place in a socially-distanced manner (such as parts of
manufacturing), were better able to adapt, and so were less affected by public health containment
measures. At the more extreme end of the latter category were the pharmaceutical and ICT sectors,
where output rose sharply last year, driven by strong international demand for immunological drugs,
Covid-related products, as well as the shift to home-working and e-commerce.
These divergent sectoral developments help to explain Ireland’s unusual economic performance last
year. While GDP rose by 3½ per cent last year, this was largely the result of strong output (subsequently
exported) in the pharma and ICT sectors; as these sectors are mostly foreign-owned, the income arising
from this production accrues to the foreign shareholders rather than to Irish residents. Exports of goods
produced abroad under licence (‘contract manufacturing’) also recorded solid growth last year,
especially in the final quarter.
On the other hand, MDD, which excludes the (direct) impact of production in these sectors, fell by 5½
per cent. This is generally regarded as a better indicator of domestic trends and, on this basis,
developments in Ireland were more in-sync with those in other advanced economies (figure 2a). Real
GNI*, which adjusts for net profit outflows and globalisation-related distortions (such as depreciation on
foreign-owned intellectual property assets located in Ireland), also provides a more relevant measure
of underlying economic trends in Ireland. While the outturn figure for real modified-GNI (hereafter GNI*)
will not be published until the summer, Department of Finance estimates suggest a contraction of
around 4¼ per cent last year, more closely aligned with the fall in MDD.
Figure 2: a) GDP in 2020, per cent change b) sectoral contributions to GVA in Ireland, pp
15
UK
10
FR
5
EA
0
MDD
DE -5 Foreign
GDP
Domestic
US -10
GVA
-15
IE
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
-10 -8 -6 -4 -2 0 2 4
Note: figure 2b excludes the statistical discrepancy from GVA.
Source: Eurostat, CSO.
Another way of looking at trends last year is through the prism of gross value added by nationality; this
is an important complementary indicator produced by the CSO which breaks down domestic production
according to whom (Irish- or foreign-owned firms) it is produced by (figure 2b). Gross value added of
Irish-owned firms contracted by 9½ per cent last year, in line with the fall in GDP in peer economies,
while value added from foreign-owned sectors expanded by 18 per cent. While these aggregates hide
a multitude of differences across firms – within both the domestic and foreign-owned sectors – these
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 11figures highlight that an important side-effect of the pandemic has been to widen further the gap
between the indigenous and multinational sectors in Ireland.
On a quarterly basis, the pathway for MDD last year was defined by the severity of public health
restrictions as the year progressed. In the second quarter, when restrictions were most stringent, MDD
fell by 15 per cent relative to the previous quarter, on the back of 20 and 25 per cent declines in
consumer and (modified) investment spending, respectively. While almost without historical precedent,
the extent of these falls was in line with that recorded elsewhere. Activity subsequently bounced-back
strongly following the easing of restrictions in the summer: MDD increased by 19 per cent in the third
quarter, reaching a level that was just shy of its pre-pandemic peak. With the re-imposition of
restrictions, domestic activity contracted once again in the fourth quarter; however, because of a shorter
duration and somewhat less restrictive lockdown, the fall in MDD was more modest at 2¼ per cent.
Greater resilience and adaptability on the part of the private sector also likely contributed to the less
severe fall in activity during the second lockdown.24
Figure 3: a) Recovery in world trade, per-shock=100 b) Exports, 4-quarter moving sum, 2019 Q4=100
105
115
100
110
95 105
90 100
GFC (Jul 2008 = 100)
Computer services
85 95
GL (Dec 2019 = 100) Pharma
Other exports
80 90
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
0 5 10 15 20 25 30
months since start of crisis
Note: Figure 3a shows world trade recovering significantly faster than during the great financial crisis in 2008-09.
GFC = global financial crisis; GL = great lockdown.
Source: CPB Netherlands, CSO
Personal consumer spending is, by far, the single largest component of MDD; it is also the component
most affected by public health restrictions and so understanding the dynamics of spending patterns is
crucial to analysing developments last year. With large parts of the average household consumption
basket essentially closed-off for at least part of the year, and aggregate household incomes largely
protected by government transfers,25 the household savings ratio – the proportion of income that is not
spent on goods and services – reached levels previously unheard of last year. In the second quarter,
for instance, the average household saved 37 cents from every euro of income; this is over three times
the normal amount that is saved (figure 6a in box 3). This was reflected in a substantial rise in
household deposits at commercial banks, which increased by over €14 billion over the year (figure 6b
24 It should also be pointed out that some contact-intensive sectors had remained closed since the second quarter,
and so, in a purely mathematical manner, remaining closed could not contribute negatively to the contraction in the
final quarter. To put it simply: if a firm was closed for the entirety of the third quarter, the fact that it remained closed
in the final quarter does not contribute negatively to the quarter-on-quarter change.
25 As always, the average (or aggregate) figure hides a multitude of differences.
Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 12in box 3), the bulk of which can be considered as ‘excess savings’. To put this in context, the level of savings at end-year, above-and-beyond what would normally be expected, reached an estimated 10 per cent of personal consumer spending. Notwithstanding the strong performance in a relatively small number of sectors, severe headwinds held back export sales in most areas. Public health restrictions in other jurisdictions, alongside a collapse in international trade (figure 3a), depressed exports of tourism and transport (down c.70 per cent) and operational leasing services (down c.10 per cent). The relative size of the pharma and ICT sectors, however, underpinned overall export growth of 6¼ per cent last year, (goods exports up 12 per cent and services broadly flat, figure 3b). The level of exports reached €124 billion in the fourth quarter (on a seasonally adjusted basis), the highest level on record. The level of imports fell by 11 per cent last year, leading to a trade surplus of around 30 per cent of GDP. The sharp fall in imports was largely due to lower levels of intellectual property assets being on- shored over the year; stripping these and purchases of leased aircraft from abroad out of the equation in order to get a clearer picture, imports were largely flat last year. Overall, a headline current account surplus on the balance of international payments of 4½ per cent of GDP was recorded, with a modified current account surplus (i.e. adjusting for globalisation-related distortions such as trade in leased aircraft and IP) estimated to be in the region of 7½ per cent of GNI*. Measurement challenges complicate the assessment of labour market trends last year. 26 While the headline figure shows that employment fell by 2.3 per cent over the year, this significantly understates the scale of the labour market fallout from the pandemic. This is because around 60 per cent of those on the PUP are treated as being employed under the official International Labour Office statistical classification methodology. These measurement challenges are not unique to Ireland, especially in Europe where there is a proliferation of short-term and other atypical working schemes. Economic assessment has, therefore, increasingly turned to ‘hours worked’ as a more representative measure of labour market trends. At end-year, the total number of hours worked in Ireland was almost 390 million hours lower than its pre- pandemic peak, a decline of 9½ per cent., while the unemployment rate stood at 18¾ per cent when those in receipt of the PUP included. 2.3 Macroeconomic Projections 2021 and 2022 2.3.1 External assumptions The global economic outlook has improved in recent months, reflecting stronger-than-expected momentum in the latter half of last year, the deployment of vaccines, and additional fiscal measures in several countries. However, the near-term outlook remains extremely uncertain and heavily dependent upon the evolution of the virus and the pace at which vaccines are rolled out. In relation to near-term prospects, diverging growth patterns are becoming increasingly evident in Ireland’s main exporting markets. Vaccine coverage is already relatively high in both the UK and US, and this should allow for a more rapid easing of containment measures in both countries, with economic activity expected to rebound accordingly. Additionally, the $1.9 trillion fiscal stimulus recently signed 26For a fuller description, see Ireland’s Unemployment Rate and Covid-19 Disruption, Economic Insights, Department of Finance, January 2021. Department of Finance | Ireland’s Stability Programme, April 2021 Update Page | 13
into legislation in the US,27 on top of other discretionary fiscal measures, will certainly boost demand in
the US; moreover, given the size of the package – at around 9 per cent of US GDP and 2 per cent of
world GDP – positive spill-overs to other countries can also be expected. 28 In contrast, supply and
other logistical constraints mean that vaccination rates have lagged in continental Europe; indeed, by
the end of the first quarter, many euro area countries had re-imposed severe restrictions in order to
suppress rapidly rising infection rates. It stands to reason, therefore, that recovery in some of the key
euro area Member States will be delayed until the second half of the year.
Table 2: external assumptions, per cent change (unless stated)
2020 2021 2022 2023 2024 2025
External GDP growth
United States -3.5 6.4 3.5 1.4 1.5 1.6
Euro area -6.6 4.4 3.8 1.9 1.6 1.4
United Kingdom -9.9 5.3 5.1 2.0 1.8 1.5
Technical assumptions
Euro-sterling exchange rate (€1=) 0.89 0.86 0.86 0.86 0.86 0.86
Euro-dollar exchange rate (€1=) 1.14 1.20 1.19 1.19 1.19 1.19
Brent crude (dollars per barrel) 43.3 63.3 59.9 57.4 57.4 57.4
Oil prices (futures) in 2021 – 2025 are calculated on the basis of futures markets as of end-March 2021.
Exchange rate outturns as of end-March 2021 and unchanged thereafter.
External growth forecasts sourced from IMF World Economic Outlook Database, April 2021 update.
Oil prices have increased significantly in recent months, reflecting a combination of both demand-side
trends (the pick-up – actual and projected – in global economic activity) and supply-side factors (curbs
imposed by several oil-producing nations). Futures markets currently suggest oil prices averaging
around $63 (€53) per barrel this year and $60 (€50) per barrel next year, significantly in excess of prices
assumed in the Department’s previous forecast round last autumn.
In terms of key bilateral exchange rates, agreement between the EU and UK on an orderly end to the
transition period led market participants to re-evaluate their medium-term assessment for sterling-
denominated assets, providing some support for sterling in the first quarter. The euro-sterling bilateral
rate averaged around €1 = stg£0.86 in the second half of March and, on the basis of the purely technical
assumption of no further change over the remainder of the forecast horizon, this would imply a euro-
sterling depreciation of around 3 per cent for this year relative to last year. A similar, purely technical
methodology results in an implied euro-dollar appreciation of around 5 per cent for this year (the euro-
dollar bilateral rate averaged €1 = $1.19 in the second half of March).
2.3.2 The Irish economy in 2021
Compiling a set of macroeconomic forecasts in the midst of a pandemic is a challenging exercise inter
alia because of uncertainty regarding the epidemiology of the virus. There is also uncertainty around
the effectiveness of the vaccination programme, itself a function of supply and the efficacy against new
variants of the virus. Possible behavioural responses of households and firms further complicate the
picture.
27 The initial proposal of the Biden Administration amounted $1.9 trillion. Following amendments as the bill moved
through the legislature, the US Congressional Budget Office has estimated the final fiscal package at $1.84 trillion.
28 OECD estimates using its global macro-model suggest the US fiscal package will boost global GDP by around
1 percentage point in its first year.
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